While robo-advisors are still relatively new in the financial advisory world, they are making an impact. For the most part, traditional or human advisors have been able to compete because they offer active management, while robo-advisors are automated and primarily focused on passive investments. Until recently, your only options for investing were to do it yourself, hire a financial advisor or turn to a robo-advisor. The tide is turning yet again. New robo-advisors, seeking a way to squeeze into the market, are offering active management to differentiate themselves from robo-advisors that offer passive management only. (For more, see: Robo-Advisors and a Human Touch: Better Together?)

Why Passive Investments?

Passive funds, such as exchange-traded funds (ETFs) that track indexes, have lower fees which is one of the hallmarks of robo-advisors. People don’t want to pay high fees without receiving the personal service that a financial advisor provides. Using passive funds makes it possible for robo-advisors to charge less than 1% in fees. (For more, see: A Guide to Choosing the Best Robo-Advisor.)

Robo-advisors who offer passive investments are relying on two schools of thought for their research: Modern Portfolio Theory and the Efficient Market Hypothesis.  While active investments can provide more custom options and advice, robo-advisors are designed to be more of a one size fits all system. Robo-advisors survey investors before choosing their investments (asking questions related to risk tolerance and time horizon, for example) to discern which investments are suitable.  (For more, see: Robo-Advisors Face First Market Downturn Test.)

Do Any Use Actively Managed Investments?

For people who want more active management but can’t afford or don't have enough assets to invest with a traditional advisor, there is a small niche available. Alpha Architect is a robo-advisor that brings active management to the robo-advisor experience. Unfortunately, while many robo-advisors have low minimum investment requirements, Alpha Architect requires a $50,000 minimum. (For more, see: Robo-Advisors' Next Frontier: 401(k) Plans.)

That’s a lot compared to services like Betterment, which has no minimum, and Wealthfront, which only requires $500. Alpha Architect’s high barrier to entry makes it less of a target for millennials still in their first few years out of college and more for people who are more established with more money to invest. Since many traditional advisors require a minimum of six figures in assets to invest, Alpha Architect is still targeting a niche that many financial advisors won’t touch. (For more, see: Betterment vs. Wealthfront: A Fee & Fund Comparison.)

However, the firm does reward those who can qualify for their services. They only charge a .25% management fee, which is comparable to many robo-advisors and even less than others. Typically, the more you can invest the fewer fees you should see. (For more, see: Robo-Advisors: 5 Predictions for 2016.)

The Bottom Line

Robo-advisor platforms were initially designed to target investors with moderate assets to invest, a population interested in investing but ineligible to qualify for a traditional financial advisor. In keeping prices low, robo-advisors use passively-managed funds, which have lower fees than actively-managed investments. But now some robo-advisors are trying to target a market that still can’t afford a traditional advisor, but wants actively-managed investments. Robo-advisors offering active investments might also appeal to millennials who started off with "traditional" robo-advisors, but now have more to invest and can afford to have more personalized service. Because robo-advisors are still new, it’s difficult to say which the better choice is. It'll vary by investor. But everyone can likely agree that the more options available for the average consumer, the better off they'll be. (For more, see: What's Next for the Robo-Advisor Space?)

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